Q4 2022 Sturm Ruger & Company Inc Earnings Call

February 23, 2023

The conference will begin shortly.

Lower Johan during Q&A, you can dial star one one.

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Thank you for standing by and welcome to Sturm Ruger as fourth quarter 2022 earnings Conference call. At this time all participants are in a listen only mode. After the speaker presentation, there will be a question and answer session.

To ask a question during the session you will need to press star one one on your telephone I would now like to hand, the call over to President and CEO , Chris Kilroy. Please go ahead.

Thank you.

Good morning, and welcome to the storm Ruger <unk> Company year end 2022 conference call I will ask Kevin Reid, our general counsel to read the caution on forward looking statements Tom Dineen. Our CFO will then give you an overview of the fourth quarter in 2022 financial results and then I will discuss our operations and the state of the market after that we'll get to your questions.

Kevin Thanks, Chris Good morning, everyone.

Remind everyone that statements made in the course of this meeting that the companys or managements intentions hopes.

<unk> expectations or predictions of the future are forward looking statements is important to note that the companys actual results could differ materially from those projected in such forward looking statements.

Additional information concerning factors that could cause actual results to differ materially from those in the forward looking statements is contained from time to time in our company's SEC filings, including but not limited to the company's reports on Form 10-K for the year ended December 31, 2022 and of course on the forms 10-Q for the first second and third quarters of 2022.

These documents may be obtained by contacting the company or the SEC or the company on the company website at <unk> Dot Com Forsyth corporate or the SEC website at SEC Gov. We do reference non-GAAP EBITDA. Please note that a reconciliation of GAAP net income to non-GAAP EBITDA can be found in our Form 10-K for the year ended.

December 31, 2022, and our Form 10-Q for the first three quarters of 2022, which are also posted on our website. Furthermore, the company disclaims all responsibility to update forward looking statements Chris. Thanks.

Thanks, Kevin.

Tom will discuss the company's 2022 results.

Thanks, Chris.

For 2022, net sales were $595 $8 million.

Diluted earnings were $4 96 per share.

For 2021, net sales were $737 million.

And diluted earnings were $8 78 per share.

For the fourth quarter of 2022.

Net sales were $149 2 million.

And diluted earnings were $1 <unk> per share.

For the corresponding period in 2021 net sales were $168 million.

Diluted earnings were $2 14 per share.

Consumer demand in 2022 was below the level of demand in 2021.

GAAP and in part by inflationary pressures pressures, which often constrained discretionary spending.

This led to an 18% reduction in our sales from the prior year.

Our profitability declined in 2022 from 2021 as our gross margin decreased from 38% to 30%.

The lower margin was driven by unfavorable deleveraging of fixed costs, resulting from decreased production and sales as well as significant inflationary cost increases and materials commodities services energy.

Fuel and transportation, which were partially offset by increased pricing.

The gross margin impact of the increased costs was exacerbated by our LIFO inventory expense, which increased $3 9 million from the prior year.

Disproportional amount of which adversely impacted the fourth quarter.

Our continued focus on financial discipline and the cultivation of long term shareholder value is evident in our strong debt free balance sheet.

At December 31, 2022, our cash and short term investments totaled $224 million.

Our short term investments are invested in United States Treasury bills.

And in a money market fund that invests exclusively in the United States Treasury instruments, which mature within one year.

After the payment of our $5 per share special dividend on January five 2023, our current cash and investment balance approximates $155 million.

At December 31, 2022, our current ratio was two two to one and we had no debt.

Stockholders' equity was $316 7 million, which equates to a book value of $17 93 per share.

Of which $12 70 per share was cash and short term investments.

In 2022, regenerated $77 million of cash from operations.

We reinvested $28 million of that back into the company in the form of capital expenditures related to new product introductions.

Upgrades to our manufacturing equipment and facilities and the purchase of our previously leased 225000 square foot facility in maiden North Carolina for $8 $3 million for use in our manufacturing and warehousing operations.

We expect our 2023 capital expenditures to total approximately $20 million.

In 2022, we returned $43 million to our shareholders primarily through the payment of dividends.

An additional $88 million was returned to shareholders on January five 2023, with the aforementioned payment of $5 per share special dividend.

Our board of directors declared a <unk> 42 per share quarterly dividend for shareholders of record as of March 10th 2023 payable.

Payable on March 24th 2023.

As a reminder, our quarterly dividend is approximately 40% of net income and therefore varies quarter to quarter.

That's the financial update for 2022, Chris Thanks.

Thanks, Tom.

As we discussed on our previous 2022 quarterly calls consumer demand in 2022 fell from the unprecedented levels that began early in 2020 and remained for most of 2021. In addition, climbing interest rates increased credit card debt and record household debt curb discretionary spending.

Consequently, the estimated unit sell through of the company's products from the independent distributors to retailers in 2022 decreased 25% compared to 2021.

In 2022, the next background checks as adjusted by the National Shooting Sports Foundation decreased 11%.

A greater reduction in the sell through of the company's products relative to adjusted mix background checks may be attributable to the following.

More aggressive promotions discounts rebates and the extension of payment terms offered by our competitors an apparent increase in the sale of used firearms at retail which are included in the adjusted Nix checks.

Not distinguished for new gun sales.

And decreased retailer inventories as the anticipation of further discounting navy encouraging cautious buying behavior by retailers.

Despite the overall decrease in consumer demand in 2022, we are encouraged by our increased quarterly production sales and distributor sell through of our products in the fourth quarter.

As we often mentioned and on our quarterly earnings calls each week, we'll review the distributor sell through in distributor inventories on a product family by product family basis to better match, our production to the demand.

While inventories of some product categories are healthy there are others, whose inventory remain below pre pandemic levels. These include virtually all of our single action and double action revolvers, many of our rightful families, including the Ruger American Certifier Ruger precision rifle, the Ruger precision rimfire, the mini 14 and $10 22.

<unk>.

In addition to these families. We are hard at work ramping up production for several new product offerings, which were also met with strong demand are a major new product launches in 'twenty to 2022 included the Marlin model 18, 95, <unk> chambered in $45 70 government, which is the first reintroduction of the Marlin <unk> family of <unk>.

Rifles.

The Marlin, while 18, 95, trapper stainless steel lever action rifle chambered in $45 70.

The LC carbine chambered in five seven by 28 millimeter a companion to Ruger five seven pistol.

The security 380 light rack pistol, a full featured pistol chambered in the light Recoiling 380 auto.

And the small frame auto loading rifle or SFA are which combines the ballistics advantages of 308, Winchester with a size or weight of a traditional modest sporting rifle.

Sales of new products, which also include the Max nine pistol LCP Max vessel PC Charger Rep.

Represented $78 4 million or 14% of firearm sales in 2022.

New product sales include only major new products that were launched in the past two years. Several popular firearms that were considered new products in 2021, including the wrangler revolver. The Ruger five seven pistol and the LCP two pistol and <unk> rifle have now been in production for over two years and we're not include.

And the new product sales calculations for 2022.

We remain hard at work and look forward to introducing additional innovative ruger and Ruger made marlin firearms in 2023 and.

And last one shot show in Las Vegas, we unveiled two additional marlin product products that were met with great excitement. The Marlin $3 36 lever action rifle chambered in the iconic 30 30 caliber that we plan to start shipping this spring.

Tomorrow at 18, 94 lever action rifle chambered in the classic revolver calibers like $3, 57% and 44 Magnum that we plan to ship later this year likely this summer.

It was an outstanding show for Us and a great way to kick off the year. We're excited as we enter 2023 for lots of reasons, our broad and diverse portfolio of products is unmatched in the industry.

Our commitment to new product development will again yield innovative and exciting firearms that will further enrich our product catalog in 2023.

Our commitment to manufacturing excellence continues to improve the quality of our products enhance the safety of our employees.

Our team of 1900 dedicated employees, 28% of whom have been with ruger for more than a decade.

Bring their gifts and talents to our American factories every day, there is no better workforce in our industry.

Our loyal customers continue to inspire us and as we innovate and delivered a rugged reliable firearms. They have come to expect from us for almost 75 years.

Our brand and bodies, our motto as arms makers for responsible citizens and delivers on our promise to be a world leader that provides a spirit of freedom recreation of peace of mind.

Our robust debt free balance sheet provides versatility and strength as we explore and consider opportunities that may emerge.

And finally, our disciplined capital strategy and relentless pursuit of cultivating long term shareholder value remains steadfast.

Operator may we have the first question.

Yes.

Okay.

As a reminder to ask a question. Please press star one one on your telephone again Thats Star one one on your telephone to ask a question. Please.

Please standby, while we compile the Q&A roster.

Our first question comes from the line of Mark Smith of Lake Street. Your question. Please mark.

Hey, good morning, guys.

Wanted to ask a little bit about Marlin and just how that's trending as far as total sales mix any additional info you can give us would be great.

Hey, good morning, Mark.

Yes.

<unk> continues to make great progress in our factory in Maine, and North Carolina.

The 18 90 fives are in full swing we have got the.

The original SPL that we started with the guide gun and alloy steel and then the Trapper model also in stainless steel and then recently at the shot show we unveiled the.

336, and 30, 30, and 18, 94%, 357% and 44 Magnum and with with the 18 94 line in particular that will basically double our production capability in north.

North Carolina, that's a what we call a square volt configuration versus the $3 36, and 895, we talked about is round bowls and that's a separate line. So that'll help us get that production up and increase overall volume coming out of data.

As we look at kind of the mix that you guys given the.

K Europe rifles kind of staying flat in dollars year over year.

<unk> plus.

Asp's for.

Orders during Q4 that were up significantly in price is it safe to assume that the Marlin is skewing. Some of these numbers higher and is becoming a pretty solid mix of your overall sales.

Yeah, that's a good assumption, especially in Q4 with the incoming orders when you look at the average selling price both Marlin and the small frame auto loading rifle carry significantly higher price points than say, a $10 two or <unk>.

Ruger American rimfire rifle category.

Okay.

And Chris just could you give us any additional theaters do you have on channel inventory as we think about.

Marlin overall, where your Marlin at Ruger, where you're at today and also kind of competitors. How do you feel as you look at distributors and retailers today and where that inventory is.

Good question.

Ireland inventory is virtually nonexistent.

The excitement for Marlin and continues to.

To really be very strong and we see that inventory go right through distributors to retailers.

And in fact retailers are still having a hard time, you'll hold on any of that inventory and so that's good news bad news is its tougher for consumers to find the product. So we're doing our best to get that production up so that people can find those marlins on the on the Ruger inventory I'd have to say, it's probably normalizes a few areas, where we see nave.

The slightly higher inventory than we'd like but by and large when you look at overall across our distributor base. The inventory is fairly normal in terms of what we like to target we'd like to think of about six <unk> turns or distributors and theyre right about there. So we're comfortable with that we do see a lot of competitive pressure out there.

We see people, particularly our competitors, particularly those who may only be one product line deep.

That have resorted to pretty significant discounting.

And deals and things like extended payment terms and things of that nature.

It always makes it challenging.

For us because we try to do that balancing act trying to maintain of course market share as well as maintaining and protecting our margins and protecting the value of our distributors' inventory.

And that was kind of my next question was just as we've seen your peers get more aggressive on promotions.

Do you expect that Youll start to follow maybe.

Light weight out of the gate or what are kind of your thoughts on pricing and promotion and what.

You need to do on their end.

While we currently got three promotions running frankly, they were a little lighter than what we had in some years past.

Include the LCP Max the <unk> two family and.

They're not as aggressive as maybe in years past, but they provide a little bit of excitement for our distributor salesperson to pick up the phone and contact retailers.

Those are having some effect I would expect frankly that the promotional environment. We will get we will get tougher as we enter in particular into Q2 and the summer months. So I wouldn't be surprised if we saw some additional promotional activity certainly from our competitors and likely from Ruger as well.

Perfect and then the last one for me matter most all months to take it but just outlook on gross profit margin as you go forward.

Expect this to continue to get squeezed and then if you can give any breakout of just how much of the pressure on gross profit margin was.

<unk> pressure and cost versus deleverage.

Well.

<unk> seen ruble over the years that may one when our volume goes up or down that deleveraging on the way down can be significant in terms of the impact on gross margin. However in this environment.

We are seeing significant inflationary pressures on a lot of our commodities, we're seeing things like.

Aluminum up 10% packaging material up as high as 15%.

Even our wooded ammo up 12% to 15% so our steels, we're largely protected with some of the long term agreements we had in place, but we expect that to continue the inflationary pressure going forward. So I think it's a combination of that deleveraging and those commodity price increases.

Okay, great. Thank you.

Thanks Mark.

Thank you.

Our next question.

It comes from the line of Rommel Dionisio of Aegis capital. Your line is open Rommel.

Thanks, very much and good morning.

I Wonder if you could just talk about.

So from a competitive standpoint, you guys have generally run you.

Our supply chain a lot more efficiently than many of your competitors.

Yes.

Kind of are where.

People are getting squeezed from the quality side.

Supply chain side I Wonder if you could just talk about what are the positions you sort of a longer term for market share gains I mean, obviously, you and how you think about your approach to 2023 constantly be 'twenty 'twenty four in terms of pricing marketing.

Do you want to kind of maximize profitability do you want to.

Gain market share.

Certainly be a time for you guys to do that how do you guys think about that strategically.

Thanks, Ralph good.

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I said, it's a balancing act looking at market share.

Maintaining gross margin in this marketplace one of the things we try to use that leverage our strong balance sheet with our cash position and no debt.

We have the opportunity to buy a little deeper on commodities like steel for example.

We'll do it we use a lot of specialty steels.

In our manufacturing and so there are certain things that we don't mind being a little deeper in raw materials, we certainly watch our work in process in our in our finished goods inventory.

When it comes to raw material, we're okay with going into a little bit deeper than maybe some of our competitors because our balance sheet allows us to do that.

So that's one way, we can I won't I won't call it a hedge against the future, but make sure we're prepared for the future whether it's increased ramping ramping up production or just making sure we have availability of those specialty steels and commodities.

In terms of maintaining market share and the ability to perhaps.

Grab market share and be more aggressive that's something we look at.

We are conservative when it comes to maintaining our gross margins, but as I said before I expect the promotional environment to heat up a little bit as we go forward. This year and that may be an opportunity for us to take some business from some of our competitors, but we wanted to do it profitably, we don't like to take that business and not make it profitable for both ourselves our wholesale.

And the retailers.

And maybe just as a follow up to that Chris.

During the kind of lasts.

Industry sort of cyclical downturn as it were you guys made obviously, a pretty significant acquisition and as we enter a period, where things again going to be somewhat challenging.

Overall.

Maybe without discussing obviously specific transaction could you discuss your proclivity to perhaps.

Make another bolt on or add on acquisition.

Yeah.

Yeah, I mean, frankly, we that we love to at the right price.

As you likely know, we're a little a little marginally when it comes to maintaining our.

Assets.

But if the right opportunity came for us, particularly on the firearms side I don't think we'll be doing anything far afield from our core business.

Firearms side that could make sense.

Again at the right price and Thats one of the reasons you know you look at the our balance sheet today, even after even after paying out $88 million in January on the on the special dividend.

Today, we are still got a cash balances of cash and short term investments of about $155 million, so pretty significant after paying out that dividends. So we're we've got a lot of dry powder and if the right opportunities there we'd like to capitalize on it.

Great. Thanks very much.

Thanks Rommel.

Thank you.

Our next question.

It comes from the line of Ryan Hamilton of Morgan Dempsey Capital. Your question. Please right.

Hey, good morning, guys. Thanks for taking taking my call.

The first question.

My first question.

You guys have talked in the past about new product releases, where you like to build a pretty sizable inventory to meet the surge of demand.

We currently are are you seeing any kind of are you pushing back any of the new releases, because the ability to build meaningful inventory.

No.

Not.

Usually it drives new product releases, obviously is just the length of time from an engineering standpoint to make sure you bring it out completely and have a safe and reliable product.

We're not holding anything back we've got a you know candidly we've got a couple of things that we are doing.

We do have some inventory, we're getting ready to release, but want to make sure. We're smart about how we do it.

Youll see those shortly and again I think we will continue our pattern of having a meaningful inventory that are we like to get it out to our distributors before before we announced it to retailers and consumers. So by the time somebody reads about it on the.

On their morning E Mail search.

At least our distributors have it hopefully our retailers our phone call away from getting that first slug of inventory as well.

I guess I could I can frame it a little bit differently as his supply chain issues and inflation, maybe come down a bit do you potentially see the cadence of new releases picking up.

Well, we're gonna go.

As fast as we can.

To be honest with the supply chain and inflationary pressures has not been a factor on our ability to release products I mean, certainly it makes it tougher, but we're going to keep the pedal to the metal and go as fast as we can weather the why.

Do we see those inflationary pressures or not okay.

Okay.

It's good to hear.

I know I always ask about the accessories business any color there.

Well accessories remains strong for us and again, a great contributor to gross margin. However.

As new guns, new sale of new guns decline.

Typically our accessory business, which is heavily driven by magazines.

That also.

Not exactly in lockstep, but trends downward or trends upward with firearms sales.

Right.

When you look at current demand would you say this is a healthier level, where we currently are then.

Chirp Spike in 'twenty late 2020 and into 2021.

I don't know if I'd call. It help there and I hope that it's sustainable and steady I mean, we obviously saw some outsized demand from non standard factors in that 2020, 2021 period everything from the of course global pandemic civil unrest defund, the police movement politics et cetera.

I think we're back now where we're seeing strong demand for some traditional categories like bolt action rifles are 10 40 twos.

I think overall when you look at some of the data out there handguns in particular has likely slowed during the course of 2022.

We're also seeing more use guns seem to be coming into the marketplace and that's just a reminder, that nix checks even the adjusted Nix checks from NSF include the sale of used guns.

Our experience over time has been inflationary pressures hit.

Pocket books at home.

Sometimes people will rather than buying a new gun by used gun and some people will in fact go back into the gun store and turn those guns does reasonably purchase guns into cash. So we're seeing a what seems to be somewhat anecdotal, but we're seeing an increase in used gun sales at retail and again, just a reminder, that those nix checks include both new.

New and used gun sales.

Right no. That's good that's good to know.

I appreciate the time keep up the good work guys.

Thanks.

Thank you.

Our next question comes from the line of Stefan daughter. Your line is open Stephane.

Hello.

Following up on marks question could I get that derive the pressure on margins is increasing.

How are labour costs affecting margins.

Hi, Stefan good question.

I think the commodity pricing pressure is there, but with Ruger. We also have the deleveraging of our fixed cost as volume decreases. So that's that was probably the primary.

Decrease in our gross margin when we look at this car report labor.

Labor costs have gone up as well all of our factories.

Increase our labor costs, we've added things like shift differentials increase in premiums there we've had some additional.

Increases to hourly wages, where it made the most sense and so as yourself and we need to do to keep pace with a track continue to attract and retain.

Good folks in our factories.

Can you include those higher.

Labor costs and sales prices.

Well in the past about.

About approximately three years we've had.

For price increases there were 3% across the board. So the most recent price increase was 3% January one of this year and that captures some of it but frankly not all of it and again in this competitive market. We have to be we have to balance the ability to raise prices with staying competitive at the retail counter.

Yeah.

I understand.

Last question from my side is about the tax rate. It was extremely low in the last two quarters will it stay there.

Go back again.

I'm going to ask Tom to take that one for you yeah. Good question Stefan.

The short answer is no it's not going to stay there in.

In 2022, we benefited.

By taking some R&D tax credits.

The emanated from prior years, so we had about a 4% differential or a 4% reduction in our tax rate in 2020.

Two most of which won't be there next year. So we think next year, our tax rate will be in the kind of be up to the 22% to 23% range. When all said and done and that compares to about 18 and a half of this year. So it will be going up those kind of.

Four points or so.

Okay. Thank you very much goes into my questions.

Thank you.

Thank you at this time I would like to turn the call back over to Chris Kilroy for closing remarks, Sir.

In closing I would like to start by thanking all of you for attending this call. This morning and for all our shareholders for their continued investment in our company.

And I would like to thank our loyal customers and our 1900 hard working members of the Ruger team, who design build and sell rugged reliable firearms every day.

Hope you will be able to join us at our virtual 2023 annual meeting on Thursday June 1st further details will become available in April .

Thank you.

Yeah.

This concludes today's conference call. Thank you for participating you may now disconnect.

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The conference will be.

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Q4 2022 Sturm Ruger & Company Inc Earnings Call

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